Very few venture capitalists in India would back an electric vehicle startup. Stellaris Ventures is one of them. The fund (over $100 million), was founded by three former partners at Helion Ventures with the idea of investing into technology startups that are solving problems for India. At Stellaris, Alok Goyal looks at investing into electric vehicles, besides looking at logistics and software as a service companies. We caught up with Goyal last week to understand why he’s bullish about investing into the EV space when most other VCs won’t do so. In this interview, Goyal breaks down the electric vehicle segment into different parts as he explains which companies could make the cut. Goyal, a SAP India executive and a partner at Helion Venture Partners formerly, also talks about the challenges facing venture capital industry in India. Edited Excerpts follow.

Jayadevan: You’ve done investments in electric vehicles. Do you think electric is moving as fast as we ought to see it moving because there has been some flip-flops around the space?

Goyal: It is hard to judge. As an investor, it is always hard to say are you too early or are you too late. Too late is very easy to answer because you would have seen some companies and realise that you can’t participate anymore. Too late is a very simple answer to give. Too early is a hard one to give. Sometimes, you may be too early. Sometimes, you may be late. Great startups are not only about great founders but they are also about catching great waves. You could be the best oarsman, but if you are sitting in a still ocean and put all the mehnat (hard work) you do, you will still not go too far.

On the other hand, even if you are average oarsman and you are able to catch the right wave, you will go much further. Do I believe that there is going to be a wave of electric vehicles in India? I believe yes. India has the most polluted cities in the world. One of the big reasons I left Delhi last year was because my younger daughter just could not breathe. We realised that we are killing her slowly. We said: forget everything else, we just have to move.

Second is that economics of electric vehicle is actually very good particularly for commercial use as long as you ride enough number of kilometers. Third, the production costs are going to come down. Battery costs are going to come down. We have seen that historically with everything. I think we will get some tailwind from the government policy as we go along.

(Editor’s note: An EV policy was among the big initiatives of the National Democratic Alliance government with targets that India would be an all-electric vehicle nation by 2030. But, the impossibility of that target – and aggressive lobbying by the $93-billion automobile industry – had the government pulling back and deciding early in 2018 that it wouldn’t have an EV policy at all. Read our report here. Also see FactorDaily’s Electric Vehicles coverage.)

Jayadevan: Within electric, one of the stories that we hear of is (smart, electric scooter maker) Ather. They have been early birds and have raised money. The product looks good. It took them a while to get to production because the ecosystem doesn’t really exist in India, but they are still slightly priced above the mass market prices. How do you see that piece changing? Ather is trying subscriptions and bunch of other things, which is interesting.

Goyal: I won’t make commentary specific to a company but let’s look at the industry. There is two-wheeler, there is three-wheeler, there are four-wheelers. Second segmentation is whether it is for commercial use or it is personal use. The third axis is that is it a utility or a need buy or is any aspiration buy. A 250-cc Bajaj Pulsar is aspirational. A 100 cc bike is a need. Two-wheelers, I again divide into bikes and scooters.

Scooters in India are actually not aspirational. Creating a premium brand in scooters in my opinion will not fly. I am not making a judgment on Ather because Ather could be saying that look today we are priced at X, but because of manufacturing experience and cost curves coming down, tomorrow we will be 60k.

Maybe that is what they are betting on. A premium segment for scooters, in my opinion, doesn’t exist. It is a very hard battle to fight because the premium market values other things. In case of scooters, you want to make sure that the upfront price is low, you need to make a strong TCO (total cost of ownership) argument, you want to make it convenient for them to recharge whether at home or shopping stations or whatever it might be, you need to prove that it is reliable. Those are the things that you are communicating to the user and the fact that it works. Maintenance cost being low.

(Editor’s note: Though it took over five years to hit the roads, Ather is one of India’s few local-bred product stories. It can’t be qualified as a success yet but in a country where services and retail trading startups are feted, Ather is one of a rare breed of companies taking aim at the physical products space hoping to vault into big-time leveraging new technology. Read how Ather built the bike here.)

On the other hand, if you were to make a utility scooter for India, which is in the 50k to 60k range, maybe even for 70k, even if they were slightly expensive, it is okay because the TCO, assuming you have certain usage of the vehicle, those in the mass scooter segment in India… actually I think I will be very, very good.

Several people are trying to come into the market. Our focus will be more on the commercial side and not on the consumer side. Commercial can be fleet owners and logistics. There are so many delivery folks. Dunzo, Delhivery, Ekart, Amazon Logistics, all those guys, that is one. Second, for them it is a very TCO-centric attempt. They calculate pennies in these logistics cost things and if you can save, it will make sense. The second segment are these Vogo kind of investments. (Vogo is a scooters rental company in Hyderabad and Bengaluru.)

For a typical consumer, the scooter gets utilised only so many kilometers in a day. You will go 8 km, come back 8 km… 16 km a day. For 22 days a month, it may not be long enough for you to be able to break you out or will take much longer to break you out.

Also what happens is that if you come back, your battery is slightly discharged, but not fully discharged, you can charge it only in the night. Every time, you do a charging cycle, there are only 800 to 1,500 charging cycles for a lithium-ion battery and, therefore, because of all those reasons, the value proposition is not strong for a single consumer. But for a fleet owner, they are renting it to five people the same day. So, for them, the economics actually works much faster. For them, it is also convenient because look at the operations they are doing today to fuel these vehicles.

Logistics is a big segment for two-wheelers. Trick here is low cost. Lower the cost, better it is. In case of logistics vehicles, speed is going to be less critical. It needs to have a higher load-bearing capacity.

Then, there is a premium bike segment. At least, we do believe that there is a premium bike segment. It is a fastest growing segment of two-wheelers in India. They are the ones who buy the Pulsar, or the Enfield. It’s a riskier play if you ask me. Creating an electric performance bike is not easy because you need a minimum range and a minimum speed.

There are a few players, which are saying that we will go up to 100-120 km/h and give you a range of 100-120 km as well. If you can make it to those specs and if you can come within the right price point, I think there is a play to be had there. Tesla did it for cars. In India, it will happen to the premium bike segment.

I don’t think it will be the car. I think car is further away in India. Car has lot more issues. Battery is far bigger. It is very expensive. The cost to performance equation vis-à-vis typical internal combustion engines is just not there yet. In India, the premium car market itself is low, then to create a premium electric vehicle becomes even lower. Government is actually not giving any subsidies either. I don’t think the market for four-wheeler is ready in India.

The three-wheeler is a fantastic market. There is a reason why India already sells about half a million electric three-wheelers, which is actually on the lead-acid battery. In fact, we don’t speak about it as a country, but in India, the electric vehicle is actually a three-wheeler.

If you go to Noida, Delhi, three-wheeler on electric is big. For them, justifying TCO is much easier because they run that necessary number of kilometres every day. Right now, however, it is all lead acid. Lead acid would a have problem that they are heavy. The one that goes into a 3 wheeler is about 120 kg. And lead-acid takes long to charge. Every 6 months you have to pretty much buy a new battery. I think we will see lithium-ion versions soon. Then there are trucks. They are hard. But there are three-wheelers that are used in logistics like the Tata Ace.

(Editor’s note: According to a Bloomberg report in October, India is home to about 1.5 million electric three-wheelers. That’s more than the number of electric passenger cars sold in China since 2011, the report says. More than 10,000 new e-rickshaws are sold in India every month and analysts say that it’s already a $1.5 billion market. More here.)Jayadevan: In the three-wheeler segment, do you see any organised brands coming in because these seem to be largely jugaadu (a ragtag approach to problem-solving).

Goyal: Very jugaadu. There are many brands therefore but the customers aren’t very brand conscious. But if somebody can create the right price point and the value proposition, I see no reason why it can’t be big.

Jayadevan: Have you looked at the size of the market in terms of three-wheelers?

Goyal: I don’t remember the numbers and I could be wrong on this. We were trying to do this exercise now. I think it is two to three million three-wheelers a year, about half a million electric every year.

Jayadevan: That is already a significant portion.

Goyal: It is. Remember why the electric thing works very well for them. We went and talked to a few electric three-wheeler drivers. They all charge at night. Where do you think they get the electricity from? Nobody paid for the electricity. It is tapped from wires on the road, so it is free. This petrol versus electricity comparison doesn’t exist for them.

Jayadevan: I want to switch a bit to the venture capital space. What has changed now?

Goyal: Earlier, when India had very few internet users, creating a venture (backed) growth was very hard. Five years ago, we would have never imagined the kind of growth you see in companies like Udaan, or our portfolio companies like Shop101 and Vogo. Today, if you have product-market fit, you can grow very rapidly. The underlying scale exists in the market today that didn’t exist sometime back.

Secondly, there are more and more India-specific issues, which are large enough problems that can be tackled through technology. Vogo, for instance, is not a copycat of something that has worked in China. If we’d done that, we would have had Ofo for India. Cycles don’t work well in India because roads are not designed for it. Weather doesn’t support it. It’s usually the last mile solution. India does not have a metro density for that last mile to be a true last mile. In India, the last mile may be 7 km, what you would do? So, the fact that in India, something like a scooter works better.

My point being that India-specific assets are now going deeper. That flavour to startups and investing is growing. We can’t just take comfort that such a thing has become big in the US or China and therefore is attractive. That is not a sufficient condition to decline or invest.

Jayadevan: The scale that is coming today vis-à-vis like 5 years ago, it is basically because of the infrastructure which has improved.

Goyal: The number of people on the internet in India are far more than ever. Even just 2 to 3 years back, it would take a new internet user 4 years to become a transacting user. Until then, you use e-mail, you do WhatsApp, chatting, Facebook, watch videos, all those things, but you don’t transact, you don’t buy. That period itself has shortened to 2- 2.5 years now. So a new user goes on to become a transacting in 2-2.5 years. Now, you juxtapose that with the growth of internet users and just look at the new volume of transacting users coming into the country. I think that is the single biggest groundswell.

Second, of course, is the quality of the internet’s bandwidth is changing. I think Jio has to be given credit for this.

And, third, infrastructure like payment and logistics have improved. People have come to trust solutions. Now, nobody questions if an online order will be fulfilled. Lastly, providers have become smarter about pushing things that they know that this audience would want.

Jayadevan: What are the challenges that you see for investing in India? At some point, a lot of funds came in but they couldn’t make a mark.

Goyal: One big challenge is the country for us is exactly what you pointed out. Venture investing started in India a little bit ahead of its time. Now, that, unfortunately, creates a bad precedent or it creates a scepticism in the market. Until there are exits, I would say we all are unproven. The most critical need of the hour for India is that in the next 3 to 4 years, we need to see some good exits in the market for there to be a continuous flow of money. Money is a very fungible thing. Money can come here. Money can go to China. Money can go to Israel or any other place. It will take flight very quickly.

I do believe that investing will become a lot more specialised and they are good additions. One is the sector investor. The other is stage. It is like any other market. Initially, when you start, same funds do all stages everything. I do believe that barring a few brands, market will need to become more specialised as we know, both in terms of partner expertise in particular spaces and also in terms of stage of investment.

(Editor’s note: Helion Venture Partners was one of the early funds to come to India. With a fund size of over $600 million, it made over 60 investments. But it didn’t have any large exits to boast of. The fund is now being sunsetted. A report in Mint sheds more light on the fund’s fortunes. Read here. Also see: Outliers podcast with Ashish Gupta, founding partner of Helion.)

Jayadevan: Venture investing has become more competitive over the last few years. There are more funds coming in. There are larger funds writing smaller cheques. What is your reverse pitch for the entrepreneur?

Goyal: More funds I think is a bit of a myth. Yes, there are more funds, but you start putting numbers against those funds, most are 50 million dollar range. You can’t build a Series A focused fund by that corpus. You need to be in the ballpark of 100 to play the Series A. In the last 10-12 years, I would argue that the number of funds who do Series A actually have remained the same. It has not gone up. Give or take, we are talking 10 to 12 funds for Series A.

Jayadevan: In terms of the exit question that you mentioned earlier, the routes in the US or other markets are much easier, I guess. You have your deep public market and then you have lot of large technology companies, which can easily absorb many of these. That is very shallow in India. Do you believe that is changing?

Goyal: There is IPO. There is selling to other company. We are beginning to see a lot more IPOs than we get in the past, not as many, but certainly that numbers have gone up. I think gradually there will be more takers for this asset class than there were in the past.

M&A can be with three kinds of companies. There could be traditional Indian companies, there could be large Indian startups and there could be foreign companies like Amazon or Rakuten from Japan and the likes. All the three varieties have or already become far more active than they were 5 years back. There is no reason to believe that they will not be more active even 5 years from now.

Jayadevan: When you go to raise money abroad and the LPs… do you see a certain scepticism because of the number of times they have got their hands burnt in India and how do you work on that?

Goyal: There is no unique answer to it. I think it depends on the person you are speaking to. There is a variety that you are talking about, which has invested in India in several cycles. Money has not come back. They are very sceptical. They are saying, ‘Let me get some of our money back, then I will think about investing. Until then, thank you very much.’

Then, there are those who think they are smart because they avoided the mistake of coming in too early. They think that they judged the market right. They feel like the timing is right now. India will go through a cycle that China has gone 10 years back and that this is the time to invest in India. Clearly, we belong to that side.

Jayadevan: Do you think some of these macroeconomic issues that we are seeing now with the banking issues and loan defaults, can that derail startup growth? Because all of this, end of the day, it is predicated on the economic growth going at a certain rate and growing consumption.

Goyal: All said and done, in India, when we say India is not growing, we say 7%.

Jayadevan: Yes, 7 is very good.

Goyal: It is a great problem to have. To be honest, I would like to call this a new first world problem that ‘Oh my god! We are not growing, we are growing only at 7%.’ Some of these issues will impact specific sectors sometime. Let us say there is a debt squeeze. A lot of lending companies will be hit in the process, but then again this is not forever. Credit crunch does not live forever. People who have raised money at the right time can weather this period out. I don’t see any sign to believe that overall India is going down the tube and therefore startups… I believe just the opposite.

Jayadevan: Recently, some valley based investors have been talking about all the capital raised by startups going to Google, Facebook and Amazon. Is there a similar thing happening here in India because we see a lot of money being spent on marketing?

Goyal: There is no standard answer to it. There are stages. Stage one of investing is: do you know believe that there is a problem to be solved and do you believe that there could be a solution to solve it? Thereafter, you are saying now let us build that product and let us test it for its product/market fit, which may mean that you will iterate a little bit. Between all three, you keep changing a few things to check whether are you hitting home.

Once you do hit home, then actually you should invest in marketing. That is the scale phase. Once you do know there is a product/market fit, you should. Good companies are extremely frugal until they hit product-market fit. After that, they go bonkers.

To your question, would we back companies, which are spending in marketing, yes we will. It depends on when they are spending in marketing, are they ready for it or not. If they are not spending when they are ready for it, then I would argue that they are not thinking big enough.

Jayadevan: One of your focus areas is SaaS, are you seeing a lot of AI coming in there?

Goyal: You can go back and see that in the early 90s, it was client-server that changed the paradigm. Then, there is a wave of cloud. Each of these was doing something very unique to the process. Cloud changed both the business model and the deployment models. It changed the economics of the business fundamentally.

AI, that way, is very fundamental because: cloud changed the business model and the deployment, but the fundamental process remains the same. AI is changing the process itself. Take an example: a bank has a front office clerk. You are opening a new account. They ask you for 10 documents. You take the 10 documents. You scan these and you put it into a system. Then, there is a checker, which is a large offshore unit, whether it is JP Morgan or anybody else, which basically gets those documents, verifies all of them.

Now, think about a second individual. Can a machine do what the second individual does? Not only can a machine do it, but it can also do it better, faster and more consistently. Today, when your car hits another car, somebody comes and sees and says: I think this will cost Rs 10,000. What if all you need to do was take 4 photographs on all sides, leave it to a machine to now judge. That is why I am saying in most of these cases, the process will be fundamentally altered.

Also see: The slow, light touch of AI in Indian Saas

Jayadevan: Are we seeing enough of that in India?

Goyal: I would say there is more noise than reality, but I don’t think that is India alone. I think it is global. That is true with any new technology. I mean these days everybody is either AI or blockchain or both, but that is okay. I think that is part of any new thing, so I don’t think we need to be overly cynical about this phase. I think this is just going to happen all the time.

We are seeing some very exciting companies to answer your question. Across so many different domains, I gave you those two examples. I think last year it was almost nonexistent. This year, we are seeing a fair bit. By next year, I think there will be dime a dozen.

Jayadevan: So, these are companies that use AI to work on a process.

Goyal: Exactly. They are rethinking a process and which is why it creates a new space. Otherwise, there are enough softwares for the existing process too. It allows you to rethink the process itself.

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